How Working Past 65 Changes Financial Planning

A 2015 Gallup poll showed 37% of Americans won’t retire until after age 65, up from 31% in 2009 and 14% in 1995.

Some of these newly minted senior citizens are delaying their retirement years out of need, having taken a hit in their investment portfolio during the 2008-2009 recession. Perhaps they tried timing the investment market and got in or out at the wrong time, or perhaps they didn’t get back into the market until it was too late.

Seniors are going into what would normally be retirement years, but they aren’t able to retire or don’t want to. Other seniors work after retirement age because they want to keep busy and stay mentally active.

Whatever the case, those retiring after the traditional retirement age have different financial planning considerations. Government benefit plans including Social Security and Medicare, for example, have an impact on seniors whether or not they use them.

Here are three financial planning areas to consider if you’re planning to work past age 65:

Social Security

If you really need the Social Security money, then take it, especially if you’re not earning much from your employment wages. But know that you’ll be penalized in benefits. Those younger than full retirement age (which the government says is 65-67, depending on when you were born) will lose $1 in Social Security benefits for every $2 you earn above $15,720 in income in 2016.

Before deciding whether to take this government benefit while working, it’s a good idea to look at your cash outflow. That means considering whether you’re putting a lot of charges on credit cards, and spending unnecessarily in other ways.

Medicare

While you may be covered under your employer’s health plan, you shouldn’t ignore Medicare. People who are working still need to be aware that there are substantial penalties if you don’t sign up for Medicare by age 65, even if you’re staying on your employer’s health plan.

When you sign up for Medicare, you are signing up for part B, which includes outpatient care and preventative services, as well as part D, the prescription drug benefit. You don’t have to tap into the benefits right away, though you’ll get billed for the premium. You can still use your employer-provided healthcare for primary coverage.

For most people, though, it makes sense to use Medicare as primary insurance, and employer coverage as backup, especially since employer coverage may pick up coinsurance and deductibles.

You’ll be hit with a 10% penalty for every year you don’t sign up for Medicare after age 65, and that penalty stays with you. That means you’ll pay 20% more at age 67, which is an ongoing penalty. Some people who are working aren’t aware of it.

Why does Medicare do this? The government wants to know what its costs will be. It’s part of the government budgeting and allocation process.

Retirement account withdrawals

Working after retirement age lets you continue adding to your retirement account. Once you hit age 70 1/2, however, you are usually required to take the minimum 401(k) or IRA distribution, even if you’re still working. (Roth IRAs don’t have this requirement.) That can be damaging from a tax standpoint. You might be getting investment income, wages and then taxable retirement account distributions. While you might not need the money if you’re still working, taking the withdrawals might still put you in a higher tax bracket.

One break, though, is if you’re working and contributing to an employer-based 401(k). You don’t have to take withdrawals from that active account, even if you’re older than 70.5.

If you’re planning to work past age 65, consider consulting with a financial advisor to make sure your bases are covered.